Wednesday, April 25, 2018

If you are a U.S.
citizen or resident and maintain an undisclosed foreign bank account, beware.
As numerous prosecutions trumpeted by the IRS make clear, the stakes have never
been higher and the potential liabilities can be staggering. Why worry?

The vaunted secrecy of
Swiss and other tax havens turns out not to be so secret after all. They've
already named names to the IRS and more are on the way. Although the UBS case was
most publicized, HSBC, Credit Suisse, and many other banks are in the mix now,
as are many foreign countries besides Switzerland. So putting your head in the
sand won't work in the long term.

The IRS had a special
"Voluntary Disclosure Program" to bring violators into the fold, but
the cutoff for participating in it was Oct. 15, 2009. If you are in that
program, you are probably still slogging through filings and disclosures to the
IRS. But if you missed that deadline--and many thousands did--beware. Sooner or
later you'll have to address this problem one way or another.

Here's what you need
to know:

1. You Must Report Worldwide Income

You must report your
worldwide income on your U.S. income tax return. Plus, you must check
"yes" (on Schedule B) if you have an interest in a foreign bank or
financial account. Worldwide income means everything, including interest,
foreign earnings, wages, dividends and other income. Even if the foreign income
is taxed somewhere else, you still must report it to the IRS. You might be
entitled to a foreign tax credit, or if you are living and working abroad, you
may be entitled to an exclusion from U.S. tax for some or all of the income you
earn abroad. But you still must report it.

2. Tax Return Disclosure Isn't Enough

Tax return filing
alone isn't enough. All U.S. persons with foreign bank accounts must also file
annually a Treasury Department Form, TD F 90-22.1 Report of Foreign Bank and
Financial Accounts--commonly called an FBAR. The FBAR is due each June 30 for the
preceding year. You must file an FBAR if the aggregate value of your foreign
financial accounts exceeds $10,000 at any time during the year. All your
foreign accounts are aggregated, so if you have two small accounts, say one in
Germany with $5,000, and one in England with $6,000, you need to file an FBAR.
If your foreign account balances at all times during the year total less than
the equivalent of $10,000 U.S., you do not need to check the box on your tax
return or file an FBAR, but you must still report any account earnings on your
tax return.

3. There Are Big Tax Penalties

If you don't comply
with one or both sets of obligations the penalties are severe. You sign tax
returns under penalties of perjury, so if you fail to report your worldwide
income--or even fail to check the box disclosing you have a foreign account--it
can be considered tax evasion and fraud. The statute of limitations on such
criminal acts is six years. Plus, the statute of limitations never expires on
civil tax fraud, so the IRS can pursue you 10 or 20 years later for back taxes,
interest and penalties. If you failed to report income, your civil liability to
the IRS can include a 20% accuracy-related penalty or a 75% civil fraud
penalty.

4. FBAR Penalties Are Even Bigger

The penalties for
failure to file an FBAR are even worse. Failing to file an FBAR can carry a
civil penalty of $10,000 for each non-willful violation. But if your violation
is found to be willful, the penalty is the greater of $100,000 or 50 percent of
the amount in the account for each violation--and each year you didn't file is
a separate violation.

5. You Can Go To Jail

Filing a false tax
return is a felony, while failing to file is only a misdemeanor--think of it as
the Wesley Snipes rule. A person convicted of tax evasion can face a prison
term of up to five years and a fine of up to $250,000. Filing a false return
can mean up to three years in prison and a fine of up to $250,000. A person who
fails to file a tax return can face up to one year of prison and a fine of up
to $100,000. Failing to file FBARs can be criminal too, and the penalties are
even more severe. The monetary penalties can be up to $500,000 and the
potential prison term is up to ten years.

6. Voluntary Disclosure Is Still an Option

If you admit your
failures to the IRS and say you want to make it right, you've made a
"voluntary disclosure." Don't confuse this with the "Voluntary
Disclosure Program," which had an Oct. 15, 2009 deadline. It is too late
for that prepackaged program, but it's not too late to make an individual
"voluntary disclosure." A voluntary disclosure must be truthful,
timely and complete. You must: cooperate with the IRS in determining your
correct tax liability; and make good faith arrangements with the IRS to pay the
tax, interest and penalties determined by the IRS.

While a voluntary
disclosure does not guarantee immunity from prosecution, the government
generally will not prosecute you if you come forward voluntarily before you're
under investigation. (If the IRS is already investigating you, all bets are
off.) Note, however, that in publicizing the IRS Voluntary Disclosure Program
in 2009, the IRS made clear it would show no mercy to those with undisclosed offshore
accounts who didn't turn themselves in by the Oct. 15,
2009 deadline. For that reason, some tax lawyers fear that the traditional
advantage of a voluntary disclosure--no criminal prosecution--is less certain.

Stepping forward
should be done through a tax lawyer to the IRS Criminal Investigation Division.
Usually the case will be referred to the civil branch of the IRS where all the
filings, amending and penalty calculations are done. You then must file amended
income tax returns for past years and delinquent FBARs. There's no bright line
for how far back you'll have to go, as situations vary. However, the Oct. 15,
2009 program required six years of amended tax returns and FBARs, so that's a
good benchmark. The total cost of making a voluntary disclosure is also hard to
assess, but it can be more than the amount in your foreign account.

7. "Quiet Disclosure" Is Also an Option

Some practitioners
consider a voluntary disclosure "noisy," since it involves going to
the IRS Criminal Investigation Division. A "quiet" disclosure
involves a correction of past problems without drawing attention to what you
are doing and without going to the IRS Criminal Investigation Division. If you
amend all past tax returns to report all income, check the box on Schedule B,
and file all past due FBARs, haven't you (quietly) fixed everything? Arguably,
yes. You would send in all the money you owe or wait to be billed. If you have been
paying foreign taxes on your foreign earnings, your foreign tax credits could
even net out the U.S. tax, so you might not owe back taxes.

If you reported and
paid tax on all your income but did not file FBARs, you should attach a
statement explaining why they were late. Perhaps you had never heard of FBARs
or were told by your accountant you were in full compliance. You can avoid
penalties if you had "reasonable cause" for not filing FBARs, but the
grounds for waiving penalties aren't terribly clear.

8. Inconsistency Will Hurt You

Can you amend your tax
returns, reporting your worldwide income and checking the foreign account box,
but not bother filing delinquent FBARs? By checking the tax return box
acknowledging your foreign account, you are admitting you have an FBAR filing
obligation. So not also filing the delinquent FBARs seems risky.

Even though FBAR
penalties are big, there have been some indications the IRS may not be pushing
them too hard. If you don't file a pile of old FBARs, perhaps it won't be
obvious you didn't file in the past? A tax lawyer cannot recommend this, but
some clients are probably choosing not to file old FBARs.

9. Prospective Compliance Only Is Risky

Can you start filing
complete tax returns and FBARs prospectively, but not try to fix the past? Some
people think the IRS is so overwhelmed with FBARs and tax returns that you
might be OK, but the risks are enormous and I cannot recommend it. The IRS may
ask about the lack of prior FBARs and of prior tax returns disclosing a foreign
account. If they ask questions, you should respond through your attorney and
you can't lie.

10. Keeping Money Offshore Is Still Legal

Should you close all
your foreign accounts and bring your money home? You are entitled to have money
and investments anywhere in the world as long as you disclose your foreign
accounts. If you are considering not trying to clean up your past tax returns
and FBARs, you may be tempted to close your foreign account. However, closing
your foreign account doesn't relieve you of the obligation to file accurate tax
returns and FBARs. Tying off the problem prospectively may make sense, but can
make your lack of compliance even worse if your actions are viewed as efforts
to conceal your previous offshore activities. For that reason, don't take any
of these steps without professional advice.

There's widespread
confusion and noncompliance involving foreign bank accounts and the situation
is unlikely to get better. Get some professional advice and try to get your
situation resolved.